Banks and Microcredit in France : involve banks in microcredit online, or through specialised organisations? The issue is not resolved.

Another new law in France on credit in May 2010 is published: primarily on
the control of consumer credit.And by the way, the government exerts pressure
on banks so they get directly involved in professional microcredit. But is this
a profitable business for banks? Surely not if they also provide counselling to
microentrepreneurs, which is essential Hence the questions about the
coordination between microfinance networks and banks.

__ 1 – Business creation in France deeply moved by recent
reforms.__

Microcredits continue to grow in France despite the economic crisis. This is
probably explained since 2007 by a specific effect: the threat to salaried
employment contributes to the creation of new businesses by the unemployed, but
also by deeper movement. In 2003 and 2005, the Dutreil Laws simplified many
procedures in business creation and then, in 2009, the “self-entrepreneur”
status (autoentrepreneur) dramatically changed the landscape of business
creation in France. Indeed, in France, new businesses increased from 215,000 in
2001 to over 300,000 in 2008, mostly very small businesses. In 2009, more than
580 000 new businesses were registered (+75% in one year) which are mainly
attributable to the new status of self-entrepreneur because other categories of
businesses declined.

The profiles of these newcomers are not very different from those of
traditional businesses; yet it is a radical innovation. The formalities for
starting a business are reduced to little things (you can register online in 10
minutes and start invoicing) and business rules are minimal provided that the
activity is very modest: maximum turnover of €32,000 per year for a service
activity (€80,000 for a commercial activity). Even though data are not yet
reliable, the magnitude of the movement is indeed still modest, as only one
quarter of self-entrepreneurs has a real activity; and an even smaller part of
them gets an income that is comparable to the minimum wage.

__ 2 - Microcredit in France: the figures.__

France is the most active Western Europe country for professional
microcredit. This is due to the overwhelming success of Adie, which has been
giving media coverage to microcredit for over 20 years, and to the more
discreet and stubborn field work of France Initiative. Both microfinance
networks are very different in their structures, their philosophies and their
targets, even if they have the common feature of being not-for-profit
associations.

In 2009, some 40,000 new business creations were financed out of the banking
networks. The large majority is divided into two roughly equal parts between
Adie, with average loans of €2,800 for small projects presented by persons in
difficulty, and the local platforms of France Initiative, with average loans of
€7,800 for larger projects. Other practitioners, such as the France Active
Network and some regional networks, have lower trading volumes.

It is likely that there is a much higher latent demand, estimated by studies
(Adie in 2008, the EIF in 2009) to be 100,000 loans per year. This is
significant, as consistent estimates show that only 15 to 30% of entrepreneurs
consider getting into debt to start their business. The remaining ones are
reluctant to take such risks, or feel they do not need a loan.

But this demand is only expressed in terms of the supply. Much of the
success of Adie is linked to this phenomenon: for a long time, people having
problems did not consider setting up a business for many reasons, one being
that these people had assimilated the fact that a bank would never trust them
and lend them the necessary money. It is thus a supply policy that has proved,
over the last 20 years, that many people have both the will and capacity "to
start their own business" and to develop sustainable projects, even when they
have no choice but to live on minimum social benefits.

3 – Two types of cooperation with banks

Two other developments are changing the landscape. On the one hand, banks no
longer content themselves with leaving microcredit networks to do what they do
not want and cannot or do not know how to do directly, that is to say small
business loans. On the other hand, the combined pressure of French government
and European authorities led the banks to get involved directly in this
universe that they are largely unaware of.

Traditionally, for over 20 years, banks in France have been outsourcing
small business loans to microcredit networks. With Adie, the agreement in
principle was clear. Adie was the one doing all the upstream work (candidate
selection, project validation and various aids to entrepreneurs) and the
downstream work (double tracking of the customers: follow up of the
reimbursements and follow up of the business management), the loan being
implemented by the bank. Then recently, Adie changed its policy to master its
own loan production from its own funds. For the local platforms of France
Initiative, the pattern is different and remains unchanged. The 500 local
committees (the ones taking lending decisions) are composed partly of local
bankers. Hence, the unsecured loans are decided in an informal arrangement with
the banks, making it easier for entrepreneurs to access additional loans from
one of the mainstream local banks.

Thus, a dual system was established, highly effective for both partners:

• The bank avoids the costs of production it considers disproportionate to
the amount of the loans and its standards of production. It leaves this work to
the associations, which receive grants to do it, but then picks up good quality
customers.

• The associations, Adie and France Initiative, show the government (which
today remains their main provider of subsidies ) that they contribute to the
creation of many healthy businesses capable of development, while the banks
show that they are unable to do this work alone.

The policies of these banks have been more or less explicit over the last
twenty years. Some prefer to adopt the attitude of sponsors (BNP Paribas),
whereas others, such as Crédit Coopératif, and more widely the Popular Banks
(Banques Populaires) that federate decentralised banks, have built real
professional partnerships close to the SME world that are strongly involved in
supporting microfinance. They have long supported the Adie initiatives, and are
heavily involved in the loan production of the France Initiative platforms.

4 – Two very different types of microcredit

Adie and France Initiative do not differ only in their targets and the
amounts of their loans. These two networks base their action on very different
philosophical grounds. Adie addresses people in difficulty who have a micro
project. Its main loan is the Solidarity Credit (Crédit Solidaire): it is a
loan of an average of €2,800, a term of 18 months, with an overall interest
rate between 10 and 12%; and Adie asks its customers for a guarantee for half
of the loan amount. The France Initiative loan is aimed at people who are not
particularly socially excluded, but who cannot, alone, have their projects
financed directly by a bank. The average loan amount is much higher (€7,800)
and funds projects much larger than those of Adie’s clients. The France
Initiative loan is an unsecured loan: that is to say without guarantee or
collateral (the borrower agrees to repay “on his/her honour”). In addition, it
is a free loan, without interest. Its main attribute is to increase
significantly the business creator’s capacity for additional indebtedness,
since this unsecured loan would be the last one to be reimbursed in case of a
problem.

The question arises whether this unsecured loan is within the definition of
microcredit. Indeed, Adie's goal is to achieve financial balance by covering
its costs and risks from the profitability of its loans: it is a goal
consistent with the vast majority of microfinance institutions, even though
studies show that this balance is unlikely in Western Europe (Evers &
Young). France Initiative depends entirely on grants and patronage, as its
operation is, by definition, in deficit and will remain that way. In addition,
France Initiative funds projects that may be considered too large to match the
definition of microcredit. According to the EU definition, confirmed in 2007,
this would be business loans of a maximum of €25,000: this is the case for the
unsecured loans of France Initiative, but their considerable leverage effect on
the entrepreneur’s additional bank debt leaves this open for debate.

__5 – The attitude of banks: disappointing from a strategic point of view
__

Since the recent financial crisis, banks in France, under government
pressure, have made commitments towards the VSE (Very Small Enterprises) in
order to support them in a difficult situation. The banks had announced, at the
request of the government, their level of commitment in 2007. Within the
category of "VSE of less than 5 years", we cannot distinguish those that would
be considered as microcredit. But we can notice that of the €400 billion of
outstanding loans granted to SMEs-VSEs, the outstanding loans related to VSEs
(turnover less than €1.5 million) of less than 5 years, among which are the
business creators, amounted to €78 billion at the end of 2007. Following the
reduction in credits due to the depression of 2008 - 2009, the Government
obtained formal commitments from the five major banking groups to increase
their commitments in 2010. But it is likely that this increase will benefit
mainly the well-established clients of the banks, and not primarily the
microentrepreneurs.

Banks have two traditional arguments to explain the weakness of their direct
engagements. On the one hand, entrepreneurs are inherently risky customers
because "one out of two fails," according to the traditional affirmations. In
fact, recent studies (INSEE - APCE, Agency for entrepreneurship) show that the
rate of "failure" is much lower(almost half of this group stops
voluntarily)

On the other hand, banks have long advanced another argument; that of the
disproportionate production costs of small business loans. If it takes the same
time to lend €5,000 as €50,000, the explanation is simple. But it also shows
that, beyond their traditional clientele of retailers and artisans, banks have
invested little in getting to know entrepreneurs. The argument of "asymmetries
of information" is weak, especially because lately they have had the ability to
adjust credit interest rates, following the recent removal of usury rules in
France. It does not seem that the opportunity to charge higher interest rates
has changed their production methods.

6 – Review the terms of coordination: amounts and profitability;
risks of competition

Thus, the situation in France is now unstable. For over 20 years, the two
main networks, Adie and France Initiative, have been giving convincing evidence
of their effectiveness, each network according to its model. But they can only
develop themselves by obtaining the cooperation of banks. The discussion is
about the fact that the ceiling of €25,000 is not a good definition. Indeed,
the implicit consequence would be to free banks from their direct
responsibilities towards the majority of small start-ups, that would be left to
the microfinance networks. So the discussion is about the amount. Banks should
commit themselves to implementing loans they could grant directly from €10,000
upwards while microfinance networks would focus on microcredit loans under
€10,000.

Is this division sustainable? Some bankers specialized in VSE are willing to
make efforts to improve productivity and thus lower the minimum amount of their
loans. But they add that if Adie, in particular, increases the average amount
of its loans, they become very close to some regular loans from the bank to its
own customers, artisans or retailers. In this case, the support that the bank
grants to Adie is less justified: both practitioners are potentially in
competition, while Adie is subsidized to implement its loans. And Adie would
possibly be in trouble as it cannot offer the additional services offered by
the bank (current account, financial services, overdrafts, credit cards ...).
The debate is open today, concerning a still small part of Adie’s "best"
customers.

Ideally, the collaboration between banks and microfinance networks develops
through mutual learning. Banks learn under what conditions some network
customers could become profitable customers for them, and microcredit networks
learn from banks about the technology they need (computer systems, scoring,
recovery techniques ...). But the limit appears quickly, if one or the other
has the feeling that customers are being taken from them!

7 –Two risks for the future: to abandon the logic of the
professional loan; and thetrend towards the dematerialisation of the
relationships between lenders and borrowers

The limits of cooperation between banks and microfinance networks are also
defined by other external pressures. The pressure on the profitability of
banks' equity capital, strengthened by the Basel Agrements: small business
loans are undoubtedly the least profitable loans for banks. Also the
competition between banks and specialised financial institutions, which changes
the nature of business loans.

By definition, business loans are based on a strong relationship between
lender and borrower, the one needing to "understand" the plan of the other. So
this requires a dialogue which implies high production costs. Whereas the
techniques of personal loans (consumer loans, revolving credit, etc..) come
down to a very quick benchmark between a personal profile and a database: this
allows specialised financial institutions to make revolving credit loans of
very small amounts, up to €100 or €200, which are very profitable.

So the temptation is great to go from one technique to the other, especially
as, in the case of micro projects, the boundaries are blurred between the
person of the borrower and his/her project. This is what has happened in some
Latin American countries since the late 90s. The banks have built a range of
personal loans in direct competition with that of microcredit NGOs who offered
professional microcredit, often in peer groups. The result is an oversupply and
severe indebtedness phenomena previously unknown . This is a risk already
present in some European countries, especially in the East, and which questions
the very logic of microcredit. There are no more physical meetings to discuss
the project, no more dialogue or assessment; whereas, by definition, clients
are people who need advice and counselling. Besides, the fact that microcredit
is accompanied by advice and counselling is also part of the European
definition.

This "debt by a click" trend converges with another trend towards the
dematerialisation of business creation procedures. In France, since 2010, just
10 minutes of Internet procedures are needed to become a self-entrepreneur and
start one’s activity. So there is no longer any physical encounter, either with
a lender, or with a counsellor.

These products are successful because they fulfil a need for no-personal
involvement in the credit relationship from poor people, according to credit
sociologists and historians, which avoids the feeling of anxiety or guilt of a
personal relationship with the traditional banker. But as a result, risks are
transferred to only one side: to the side, in case of a problem, of the one who
has "made a mistake" in borrowing, and not from the side of the credit
supplier. It is in this that lies one of the sources of the risk of new forms
of overindebtedness.